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January 23, 2013

Money Floods Into Stocks via ETFs as Industry Hits 20-Year Mark

Passive funds that track U.S. stocks get a majority of flows as equity markets rebound, say BlackRock CEO Fink and ETF Trends’ Lydon

As more money than ever pours into exchange-traded funds, investors are using increasingly popular and well-established ETFs to buy stocks through passive funds that track equities.

ETFs are soon expected to surpass a record $2 trillion in global assets. Last year marked an all-time high for the industry on the eve of its 20th anniversary, with a $292.7 billion, or 28% rise, in U.S. ETF assets and positive cash flows of $182.6 billion, according to State Street Global Advisors. SSgA offers the industry-leading SPDR ETFs that include the first-ever U.S.-listed ETF, the SPDR S&P 500 ETF (SPY), which launched on Jan. 29, 1993.

“Passive funds tracking U.S. stocks are gaining popularity as equity markets are on the mend,” Global Trends Investments President Tom Lydon wrote on Tuesday, also citing BlackRock CEO Larry Fink: “What we are seeing, and the industry overall, are still a majority of flows moving more into passive.”

Lydon, who also is publisher of the ETF site ETFTrends.com, cited Fink just one day ahead of ETF Trends and RIA Database’s ETF Virtual Summit, whose marquee sponsors include SPDR and BlackRock iShares along with Morningstar.

“The U.S. equity market had been dodged since the financial crisis in 2008,” Lydon said in explanation of the trend toward ETF investment. “Institutional investors generally favor ETFs, while retail investors still favor mutual funds. This pattern is expected to tilt with more individual investors using ETFs as the tax benefits and lower fees become more evident.”

Thousands Attend ETF Virtual Summit

Thousands of advisors were expected to attend the virtual summit from around the world, as the ETF industry puts a premium on education efforts. Nearly 6,000 advisors attended last year’s summit. Topics addressed this year include methods for pursuing yield in a low-rate environment, advisor portfolio construction methods and alternative investing to hedge risk.

The summit also offered CE credits for advisors who attended strategic sessions. For example, in “Equity ETF Strategies for 2013: US, Global, High Dividend & Low Volatility,” a panel of experts discussed the current market environment and specific opportunities and potential pitfalls in various asset classes.

Fidelity Investor editor Jim Lowell introduced the topic by noting that the landscape for ETFs is global in nature, while SSgA Executive Vice President Alistair Lowe spoke of the benefits of a well-diversified portfolio that looks internationally at foreign equities along with alternative asset classes such as commodities (energy, precious metals, agriculture). WisdomTree Director of Research Jeremy Schwartz, meanwhile, warned investors away from bonds, today’s most expensive asset class.

In addition to featuring big-name speakers such as PIMCO’s Bill Gross and Research Affiliates’ Rob Arnott, the summit was host to an active presence among the Twitterati using the hashtag #ETFVirtual, plus an exhibit hall with online location chats, a network builder, a resource center and a networking lounge.

Schwab, Like SPDR’s SPY, Marks Big ETF Anniversary

Separately, as SPY marks its 20th anniversary, a large number of Charles Schwab ETFs have just reached their important three-year benchmark, which advisors often look for when considering ETF products to invest in.

SCHB, SCHX, SCHA and SCHF ETFs hit their third year last November, and SCHV, SCHG, SCHC and SCHE joined the three-year-olds in mid-January. Schwab now offers a total of 15 ETFs, which have all reached scale at more than $200 million in assets, with some going as high as $1 billion.

“Our strategy is that we want to be in the core asset classes, so we are in close contact with advisors and what they’re looking for,” said John Sturiale, vice president at Charles Schwab Investment Management, in a phone interview on Tuesday. “Schwab’s strength is listening to what advisors want, and we have the distribution channel to roll out those products.”

Asked if the much-discussed ETF price war has hurt the industry, Sturiale answered that to the contrary, price compression on fees is helping.

“There’s more acceptance in the investing community that ETFs are here to stay,” Sturiale said. “At the end of the day, lower prices help the investor. And though Schwab is a money manager, we’re also a full financial services firm. We look at the totality of the client, and not what we’re just making on the ETFs. It’s a great low-cost way to open the door.”